The business of buying accounts receivables is called “factoring.” You, the purchaser, buy the accounts for a certain percentage of their overall value. You then collect from the debtors. When you receive payment, you give the person or business with whom you’ve contracted the difference between the overall value and the percentage you've already paid. You subtract a percentage from this balance for your trouble. The arrangement can be a cash-flow savior for an attorney if he feels uncomfortable calling his own clients and asking them to pay up.

Identify a law firm likely to need your assistance. Look for an attorney specializing in a field that bills hourly, such as family law. These are more prone to have outstanding receivables. Personal injury attorneys are paid a percentage of the awards they recover for their clients, and bankruptcy and criminal law attorneys usually require payment upfront.

Approach the attorney or attorneys you’ve identified to determine whether they’re interested in selling to you. Expect them to be leery; law involves a certain level of client confidentiality, so they might be reluctant or unable to share certain portions of their files with you. You'll have to sell yourself as reputable and trustworthy.

Review the attorney’s fee agreements or retainer agreements with the clients from whom you'll be collecting. Many include fee arbitration clauses, language instructing the client to contact the state’s fee arbitration committee to dispute charges. This usually involves a hearing before the committee. You might be getting involved in something you’re neither inclined or able to handle. If the client chooses a fee arbitration option rather than paying you, you could be in for a prolonged battle before you collect from him, if you manage to collect at all.

Negotiate the terms of your purchase agreement with the lawyer, if his accounts receivable are something with which you want to be involved. Decide how much you’re willing to buy the accounts for. This usually ranges from 50 percent to 80 percent of the value of the receivables, according to Bankrate.com. Negotiate the percentage you’ll take from the overall balance after you collect it. Bankrate.com indicates this is usually 1 percent to 5 percent.

Collect the accounts receivable from the attorney’s clients and calculate your earnings. If you buy a $25,000 account at 80 percent, you would pay the attorney $20,000 for the account up front. You’d then do his collection work for him and collect the entire $25,000. If you charge him 5 percent for the service, you would calculate 5 percent of the total amount collected. This results in a fee of $1,250, which you would then deduct from the $5,000 balance. Pay the attorney an additional $3,750 and keep $1,250 in exchange for your services.

Tip

When you negotiate your purchase agreement with an attorney, try to mitigate potential losses. Include language to the effect that if you're unable to collect from a client within a certain period of time, such as three or six months, the lawyer will reimburse you for your initial purchase. Such clauses can also protect you if you collect less than the full amount. You can ask that the attorney reimburse you for any uncollected percentage. For example, if you collect $22,000 of the $25,000, the attorney would return to you the difference of $3,000. These clauses are all points of negotiation, however. An attorney might not want to use your services if you insist on these protections.

Warning

When a client refuses to pay his attorney after a case is settled, it’s often because he’s not happy with the result. If you’re going to be successful when buying a law firm’s receivables, you’ll have to overcome this hurdle. This is especially true in areas of law where the attorneys are most likely to bill hourly and therefore have outstanding accounts in the first place.